Lease Accounting: 5 FAQs
As part of SolomonEdwards’ 5-in-5Thought Leadership Series, Brian Markley, Managing Partner of our Transaction & Regulatory Advisory Services Practice, has addressed five lease FAQs that you can read in only five minutes.
Q1: What is your suggestion for structuring a lease accounting compliance project?
Step one is to start with your known lease population, whether it’s 50, 100 or 1,000 leases. Your known lease population are the leases that make up your current lease commitment footnote that’s already in your financials. Gather the final, executed copies of those leases. Reconcile the expense for those contracts to the schedule and to your general ledger. Revisit the work done to determine lease classification and accounting under current GAAP. By taking steps to gather and validate the data in your known lease population, you will check an important box in setting the stage for a successful implementation of ASC 842.
Q2: What will I uncover from this recommendation?
For most companies, lease administration and accounting has not been a top priority. Therefore, you may find missing or incomplete contract records, poor documentation underlying current lease accounting classification and accounting decisions and/or material differences in reconciling your current lease footnote to supporting schedules and your general ledger. While these types of issues are not uncommon, resolving them is important to ensuring you have a good starting point for considering the impact of ASC 842 adoption on your company.
Q3: What should I do if I uncover issues in my known lease population?
If you are missing lease contracts, collaborate with other functional groups in your company to determine if they have copies. For example, the legal or purchasing departments may have a copy of the missing lease, or you can contact the lessor for a copy of the lease documents. If poor ASC 840 lease classification documentation is your issue, you can select a small sample of leases and reperform the lease classification tests on those leases to determine if potential misclassifications exist. With respect to reconciling lease data to the general ledger, you are likely to uncover that your lease expense accounts include items that may be considered non-lease components under ASC 842. Thus, the time invested in completing a good reconciliation will often result in improving your ability to ensure you are accounting for these items appropriately upon adoption of the new standard.
Q4: What best practices have been learned from working with public companies thus far?
At the risk of sounding like a broken record, start early! The public company clients we began working with prior to 2018 had a jump start, albeit with some more intense work into the home stretch. As a private company with most of 2019 to get working on this, take advantage of that time. Document your ASC 840 accounting policy now. Also take some time to think through the question of: “Do I need a lease system or not?”
Q5: Which stakeholders are critical to gathering information?
Adopting the new lease accounting standard cannot be done successfully without engaging other functions in your company. Critical stakeholders who should participate in conversations and your adoption working group include: purchasing colleagues (who are entering into these leases); the real estate group (for larger companies); facilities; general managers; and operations managers (at the plant level); as well as folks in IT and tax. Collaboration and proactive project management are two essential ingredients to ensuring a successful ASC 842 adoption initiative.
Contact your local SolomonEdwards team today to learn more about the new lease accounting standard and set your course for a successful adoption.
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